Ex-Im Bank Pays the U.S. Back

When I was a teenager, a conservative group called the Eagle Forum started focusing its attention on my hometown. One of the things they demanded was that children be taught to read using a system called phonics, i.e. sounding out words. To everyone but the Eagle Forum, phonics seemed like an odd thing to focus on. No one besides them cared in the slightest. The push eventually fizzled out when it was discovered that our schools already used phonics, but I’m sure that had that not been the case, the Eagle Forum -- which, with its squawking ambushes, is more blue jay than eagle -- would have succeeded in getting us to switch, just to make them stop bothering us.

The Tea Party’s assault on the Export-Import Bank reminds me a little of the Eagle Forum’s push for phonics. A right-wing group convinces itself that some peripheral issue is really, really important, launches a crusade against it, and charges to victory before anyone else can even bring themselves to believe that anyone would possibly care. In the case of Ex-Im, the defenders -- who include Republicans such as Rick Perry -- may scramble in time to repel the blindside. But some damage will already be done, since firms that count on the Ex-Im Bank will now have to worry that the Tea Party hordes will eventually succeed in killing it. Even if Ex-Im survives, using it will now entail greater political risk.

But wait -- is the Export-Import Bank really a good thing? Basically, what it does is lend money to U.S. exporters. The bank is specifically mandated only to lend money for deals in which the private sector is unwilling to participate:

It is also the policy of the United States that the Bank in the exercise of its functions should supplement and encourage, and not compete with, private capital.

Now obviously, it’s impossible to know exactly which deals the private sector would or wouldn’t finance if there were no Ex-Im Bank. But since Ex-Im only finances about 2 percent of U.S. export deals, there’s definitely not a lot of competition between Ex-Im and the private sector.

Why on Earth would we want the government to finance trade deals that the public sector won’t touch? If the private sector won’t finance something, doesn’t that mean it isn’t worth financing?

Well, yes…if you believe that financial markets work perfectly in the absence of any government intervention. Do you believe that? I don’t.

In our finance system, investment decisions are (theoretically) made according to a corporation’s internal rate of return (how much money it will make off of the investment), and its cost of capital (how much it costs to finance the investment). If the prices of a company’s stocks and bonds fluctuate too much – and there is evidence they do – then the cost of capital will be wrong. And if company managers make decisions to maximize the short-term value of their own stock options, then the effect of financial markets on business investment decisions will be even farther from optimal.

In fact, a number of people claim that a malfunctioning finance industry is causing big problems with U.S. corporate governance. If that’s true, there’s a chance that the Export-Import Bank might not distort the economy very much after all.

So we should be very careful about swallowing the high-school-textbook case that Ex-Im distorts the economy by “picking winners.” The other case is that Ex-Im just isn’t fair – that it creates losers as well as winners. But that’s also true of free trade! The case for free trade is that it boosts the overall economy; if the Ex-Im Bank does the same, we should keep it.

Now I don’t actually know if the Ex-Im Bank is good for efficiency. The U.S.’s large and persistent trade deficits are a hint that perhaps not all is right with our market system. As a country we seem to be especially bad at exporting manufactured goods – exactly the thing that Ex-Im helps with. If we kill Ex-Im, there seems to be a real possibility that whatever is causing our trade deficit might get worse.

The crusade against Ex-Im appeals to the Tea Party, because it combines traditional anti-government fervor with the rage against large corporations that has developed in the wake of the financial crisis. And it appeals to many center-left types, who are also anticorporatist. The Ex-Im Bank certainly creates losers, certainly helps politically connected large corporations, and is certainly a corporatist institution. That does not mean it should die. Since Ex-Im doesn’t actually cost the taxpayer any money, it’s not like it’s a pressing issue. We should think carefully and deliberate calmly, and not simply give in to the squawking blitzkrieg campaign.

Noah Smith is an assistant professor of finance at Stony Brook University
and a freelance writer for a number of finance and business publications. He maintains a personal blog, called Noahpinion.
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